Dear Aunty B,
I have just been offered the chance to purchase my employer’s business. This is a small recruitment agency operating in a niche sector of the marketing/advertising industry.
The business has been in operation for about 10 years, and up until about three years ago my employer was the only person working in the business. The business has good customer loyalty with most work coming from existing clients or candidates we have worked with previously.
My employer has asked for a significant purchase price – am I crazy to even consider this given the current financial turmoil? It would involve us taking out a bank loan. Any trends or prediction on recruitment you could share?
Business owners looking to sell a business, particularly a service business, are often advised to consider their employees as potential buyers. There is good reason for this as about 20% of businesses are purchased by employees.
So first point is, don’t take it personally.
On the other hand if you are going to buy a business it is a good idea to buy one you know and understand.
Andrew Kent who is our buying and selling a business expert has this advice for you.
He says that if you want to buy the business, then you are going to need to negotiate a number of things; price, payment terms, and handover arrangements. All of this needs to be appropriately contracted. One of the first things you need to consider is the market value of the business. Value my business is a good start for doing this. You also need to consider the value of the business to you.
Price: There are two key considerations in this regard, the business assets and the future earnings. In a service business the key assets are the staff, systems and customers. The irony here is that part of what you will be buying is you.
The second and perhaps more important asset is the future earnings. Recruitment is a cyclic business, it goes very well in good times, and does it tough in hard times. This volatility is determined in part by the volatility of your customers. Media and marketing are also cyclic industries. With the economy heading into hard times the business’s earnings through a decade of boom times will provide little indication of your future earnings. Haggle hard on price – you are in a buyers market.
Payment terms: If you can get to an agreement on the price, try and negotiate a series of payments rather than a lump sum up front. This might even be part of the price negotiation, pay for the business assets up front, and for the future earnings based on a multiple of the first full year’s earnings.
In this regard, you may also want to consider the timing of your purchase; try and make the transfer of ownership at the start of the peak season rather than the end. Spreading the payment terms will also assist you with the affordability and financing of the purchase.
Handover arrangement: This will depend in part on your relationship with your current employer. Regardless of how good this relationship is, make sure everything is in the contract – everything! Things you might like to consider here are timing of the handover, how it will be presented to staff and customers, what assistance you will get from the current owners, etc.
When considering your financial arrangements, a key consideration is interest coverage, this is the difference between your earnings and the cost of your interest payments in a given period.
In a business with no traditional assets, this will be a key consideration for a potential lender. Pivotal to this is looking at your worst month. So you will also need to do a close assessment of the cash flow. You may have large loyal customers, but how quickly do they pay? Also how high are the peaks and troughs?
One final point; business ownership is not for the faint hearted, particularly in uncertain economic times. If the prospect of owning and running a business does not float your boat, then perhaps it is not for you.
However guess what? Many great businesses come from troubled times!
Your Aunty B
Brendan Lewis writes: I’m thinking you should have mentioned “what exit do you expect?” Is she simply buying a job? Knowing how she will want to exit from this business will help her decide how the deal should look; such as, flip it in three years, and who to?